Speculation is mounting that Oman’s insurance sector will witness further mergers and acquisitions if margins remain tight in the coming year. While the introduction of sharia-compliant insurance is expected to drive expansion in the industry, questions remain about both the length of time it will take for insurers to develop new products and whether take up will meet expectations.
Insurers have reiterated their call for an easing of restrictions governing the industry as Oman’s policy writers seek out new avenues of growth on the back of a difficult year.
At 25, the number of insurers in Oman is often viewed as high for the country’s population, which stands at around 2.7m. The chief executive officer of Dubai-based Gulf Reinsurance, Michel Gertsch, said Oman’s insurers, especially smaller businesses, were likely to find themselves under pressure to consolidate.
“In the next two years we will see the formation of larger regional companies into which probably a lot of smaller companies will be absorbed,” he said in mid-December.
The year 2011 brought a number of challenges for Omani insurers, with many companies suffering a drop in profits or posting losses. The sector was hit particularly hard by payouts made on claims for storm damage and flooding.
Weaker returns on investments last year have also prompted a renewed call from industry representatives for a reconsideration of the amount that companies are permitted to invest outside of the region.
At present, the sector’s regulatory body, the Capital Market Authority (CMA), caps the amount at 25% of a company’s portfolio. Policy writers, who have long been lobbying for changes to the regulations, have told local media the ceiling is restricting development in the sector and denying them investment opportunities in other markets.
The managing director of the Oman United Insurance Company, Nassir bin Salim al Busaidi, lent support to calls for a review of the investment regulations governing the sector, warning that 2012 could be a lean year for insurers if the CMA decides against easing restrictions.
“Insurers are facing challenges from all sides; from the rising cost of claims to investments in real estate and equities,” he told the Muscat Daily on January 21. “All these factors are putting pressure on companies’ profitability and capital base, and finally on shareholders. If we put money in fixed deposits with banks that also does not give any significant return due to very low interest rates on deposits.”
A study by the research and consultancy firm Frost and Sullivan published last month suggested that insurance companies may have to consider negotiating with the CMA if policy writers are to find ways of boosting earnings.
In the meantime, the launch of Oman’s sharia-compliant segment is widely believed to signal a new era for the country’s financial services sector and the insurance industry in particular. A report by international financial consultancy Islamic Finance Advisory & Assurance Services (IFAAS) issued in December 2011 highlighted the key role earmarked for Islamic finance in the Sultanate, saying it was “anticipated to change the country’s financial landscape over the next decade with far reaching positive effects for the overall economy”.
Initial prospects for the fledgling segment look promising, with hopes high that it will provide the insurance sector with a new means of growth. General optimism is supported by the IFAAS’ report, which puts the number of Omani consumers interested in taking up sharia-compliant finance products, such as takaful, at 85%.
While industry players will be looking to sharia-compliant products to help drive up investment earnings, insurers are aware that it will take time to gauge the impact that the Islamic insurance market has on the sector as a whole.
Insurers will also be mindful of the time it will take for takaful to establish itself in the market and for companies to develop their product range and train staff. Additionally, some industry players may choose to adopt a watch and wait approach to see whether the IFAAS’ forecast of a major shift by policyholders to sharia-compliant products materialises.
Although 2012 will bring challenges to insurers, Oman’s efforts to drive economic expansion, particularly in infrastructure projects, should also provide opportunities for businesses operating across the sectors, including the insurance industry.
Frost and Sullivan’s study highlights the government’s economic stimulus programme, which it states could boost growth in the sector through its plans to roll out infrastructure projects. “The four-year, $39bn infrastructure development initiative undertaken by the government in 2011 is expected to bring increased business from construction projects,” it said. Nevertheless, 2012 looks likely to be a year characterised largely by caution and consolidation.